72 – resolving old debt

Corey and I worked seriously hard over the last five years together to get rid of an awful lot of debt.  Here are some of the moves we made to do so:

  • We used the debt snowball system that Dave Ramsey made popular.  One debt at a time, make minimum payments to everything else, and throw every other dollar at the chosen one to get rid of it. Stop worrying about whether to take the lowest balance, or the highest payment, or the highest interest rate.  Just pick one and get started.
  • However, the completely defaulted credit cards that were hangovers from Corey’s previous marriage ranged from one with a $4,500 balance to one that was more than $15,000.  By the time we married, the debt had been sold to collection agencies three or four times. Every time you see the billing agency change, it means that the debt has been resold for pennies on the original dollar.  So, in other words, that $15,000 debt was probably purchased for a couple grand by the time it got to the 5th sale.  They were more than happy to work with us to pay back a smaller amount.
    • Two big gotchas:
      • If you have defaulted debt like that out there, the biggest mistake you can make is to start making payments to it again–it resets the debt clock, and you are on the hook for the whole amount once more. Don’t pay a dime until it’s time to sit down with them and negotiate.
      • Whatever amount you do not pay of the original debt will be taxed as income by the IRS.  On that $15,000 debt, we paid off $5,000 of it, and $10,000 of it was considered income by the IRS. Not joking–and the fact that it seems like they’re kicking you when you’re down and trying to survive is something you just have to get over.

Why didn’t we go with the consumer credit counseling services? Well, first off, Corey had a bad experience with one them the first time he tried to get out from under his debt load. The theory is that you pay the CCC service one fairly low payment, they talk to all your credit card companies, negotiate lower payments, reduced debt, etc. Evidently, they started making late payments almost immediately, thereby ruining his credit even further. Not saying it happens with all of them, but it did take it off the board for us.

There are lots of choices, and people who know more than we do about getting out of debt.  But it can be done.  And from this perspective, it is SO worth doing.  Good luck.

 

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